U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ___________
Commission File No. 0-26682
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
----------------------------------------------
(Name of Small Business Issuer in its Charter)
Delaware 11-3199437
- ------------------------------- ---------------------------------
(State or other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
10 Edison Street East, Amityville, New York 11701
-------------------------------------------------
(Address of Principal Executive Offices)
(516) 842-7600
------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES |X| NO |_|
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of outstanding shares of the issuer's common stock, par value $.01
per share, as of April 28, 1999, was 12,449,623.
Transitional Small Business Disclosure Format (check one):
YES |_| NO |X|
<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
INDEX TO FORM 10-QSB
March 31, 1999
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. - Financial Statements (Unaudited)
Consolidated Balance Sheets at March 31, 1999
and December 31, 1998.......................................... 1
Consolidated Statements of Operations
for the Three Months Ended March 31, 1999
and March 31, 1998............................................. 2
Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 1999
and March 31, 1998............................................. 3
Notes to Consolidated Financial Statements..................... 4
Item 2. - Management's Discussion and Analysis or
Plan of Operation.......................................... 6
PART II - OTHER INFORMATION................................................ 10
SIGNATURES................................................................. 11
-i-
<PAGE>
PART I
ITEM 1. - FINANCIAL STATEMENTS
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
CONSOLIDATED BALANCE SHEETS
(in U.S. Dollars)
<TABLE>
<CAPTION>
AT AT
MARCH 31, DECEMBER 31,
1999 1998
(Unaudited) (Note)
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 116,839 $ 317,034
Receivables, net 3,287,508 2,526,729
Inventories 2,692,231 2,802,284
Prepaid expenses and other current assets 36,296 32,757
------------ ------------
Total current assets 6,132,874 5,678,804
Fixed assets, net 585,459 604,511
Intangible assets, net 1,067,520 1,108,058
Other assets 405,364 371,656
Notes receivable from related parties 275,087 269,732
------------ ------------
Total assets $ 8,466,304 $ 8,032,761
============ ============
LIABILITIES
Current liabilities:
Accounts payable $ 1,549,983 $ 1,621,887
Accrued expenses 543,021 611,150
Revolving credit facility 1,987,634 1,612,634
Current portion of long-term debt 35,807 34,562
------------ ------------
Total current liabilities 4,116,445 3,880,233
Long-term debt 31,183 40,616
Deferred credits 324,817 321,727
------------ ------------
4,472,445 4,242,576
STOCKHOLDERS' EQUITY
Common stock:
$.01 par value, issued 12,449,623 shares 124,496 124,496
Paid-in capital 10,178,011 10,178,011
Accumulated deficit (6,308,648) (6,512,322)
------------ ------------
Total stockholders' equity 3,993,859 3,790,185
------------ ------------
Total liabilities and stockholders' equity $ 8,466,304 $ 8,032,761
============ ============
</TABLE>
Note: The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes.
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<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in U.S. Dollars) (Unaudited)
<TABLE>
<CAPTION>
For the three months ended March 31,
------------------------------------
1999 1998 (Note)
------------ ------------
<S> <C> <C>
Net sales $ 3,642,388 $ 3,587,732
Cost of sales 2,064,308 2,127,904
------------ ------------
Gross profit 1,578,080 1,459,828
------------ ------------
Operating expenses:
Selling 572,230 668,084
General and administrative 406,818 459,431
Research and development 311,579 391,097
Amortization 40,539 90,306
------------ ------------
Total operating expenses 1,331,166 1,608,918
------------ ------------
Income (loss) from operations 246,914 (149,090)
Interest expense, net (39,304) (36,982)
------------ ------------
Income (loss) before provision for income taxes 207,610 (186,072)
Provision for income taxes (3,936) (1,200)
------------ ------------
Income (loss) from continuing operations 203,674 (187,272)
Loss from discontinued operations -- (137,966)
------------ ------------
Net income (loss) $ 203,674 $ (325,238)
============ ============
Net income (loss) per common share:
Continuing operations $ .02 $ (.02)
Discontinued operations -- (.01)
------------ ------------
Net income (loss) per share $ .02 $ (.03)
============ ============
Weighted average shares outstanding 12,622,878 12,374,623
============ ============
</TABLE>
Note: The consolidated statement of operations for the three month period ended
March 31, 1998 has been restated for presentation purposes to reflect the
Company's discontinued operations relating to the Company's sale of its
Seasoning Division on August 25, 1998.
See accompanying notes.
-2-
<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in U.S. Dollars) (Unaudited)
<TABLE>
<CAPTION>
For the three months ended March 31,
------------------------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 203,674 $(325,238)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 77,066 256,190
Deferred rent 3,090 3,090
Changes in assets and liabilities:
Accounts receivable (760,779) (853,519)
Inventories 110,053 181,754
Prepaid expenses and other current assets (3,539) (45,947)
Other assets (33,708) (59,955)
Accounts payable (71,904) 736,963
Accrued expenses (68,129) (241,596)
--------- ---------
Net cash used in operating activities (544,176) (348,258)
--------- ---------
Cash flows from investing activities:
Purchase of fixed assets (17,476) --
Notes receivable (5,355) 4,611
--------- ---------
Net cash (used in) provided by investing activities (22,831) 4,611
--------- ---------
Cash flows from financing activities:
Proceeds from revolving credit facility 675,000 250,000
Repayment of revolving credit facility (300,000) (387,500)
Repayment of capital leases (8,188) (6,886)
--------- ---------
Net cash provided by (used in) financing activities 366,812 (144,386)
--------- ---------
Decrease in cash (200,195) (488,033)
Cash - beginning of period 317,034 582,972
--------- ---------
Cash - end of period $ 116,839 $ 94,939
========= =========
</TABLE>
See accompanying notes.
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<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
1. BASIS OF PRESENTATION
Technology Flavors & Fragrances, Inc. (the "Company") develops and
manufactures flavor and fragrance products used to provide or enhance flavors or
fragrances in a wide variety of consumer and industrial products.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three month period ended March 31, 1999 are not necessarily
indicative of the results that may be expected for the full year ending December
31, 1999. These unaudited consolidated financial statements should be read in
conjunction with the consolidated financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1998.
The accompanying unaudited consolidated financial statements of the
Company for the three month period ended March 31, 1998 have been restated for
presentation purposes to reflect the Company's discontinued operations relating
to the sale of its Seasoning Division on August 25, 1998.
2. INVENTORIES
Components of inventories are summarized as follows:
March 31, 1999 December 31, 1998
-------------- -----------------
Raw Materials $1,699,465 $1,718,553
Finished Goods 992,766 1,083,731
---------- ----------
$2,692,231 $2,802,284
========== ==========
3. EARNINGS PER SHARE
Basic net income (loss) per share is calculated using the weighted average
number of shares of common stock outstanding during the period. Diluted net
income per share for the three month period ended March 31, 1999 was calculated
using the weighted average common and common
-4-
<PAGE>
equivalent shares that were outstanding during the period. The effect of common
stock equivalents for the three month period ended March 31, 1999 was not
material and, thus, diluted net income per share was not presented. For the
three month period ended March 31, 1998, the effect of common stock equivalents
was anti-dilutive, and thus, diluted net loss per share was not presented.
4. REVOLVING CREDIT FACILITY
The Company's current $2,750,000 revolving credit facility (the "Credit
Facility") with its lender expires on June 30, 1999. On April 30, 1999, the
Company obtained a commitment letter with another lender regarding a three year
$3.0 million credit facility (the "1999 Credit Facility") to refinance the
existing Credit Facility. The closing of the 1999 Credit Facility is subject to
numerous closing conditions, including entering into a definitive credit
agreement.
-5-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
First Quarter 1999 Overview
During the latter part of 1998, the Company focused its efforts on
achieving the goals identified in its 1999 strategic business plan. Such goals
included expanding the Company's sales and marketing activities and implementing
a cost reduction program and operating efficiency improvements. The results of
these efforts contributed to the Company's net income of $204,000 for the first
quarter of 1999 as compared to a net loss of $(187,000) for the first quarter of
1998 relative to its continuing operations.
Results of Operations
The following information for the three month periods ended March 31, 1999
and March 31, 1998 has been derived from the Company's unaudited consolidated
financial statements and should be read in conjunction with the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1998.
<TABLE>
<CAPTION>
Three months ended March 31,
---------------------------------------------
1999 1998
------------------- ---------------------
(dollar amounts in thousands)
<S> <C> <C> <C> <C>
Net sales $ 3,642 100.0% $ 3,588 100.0%
Gross profit 1,578 43.3 1,460 40.7
Operating expenses:
Selling 572 15.7 668 18.6
General and administrative 407 11.2 460 12.9
Research and development 312 8.5 391 10.9
Amortization 40 1.1 90 2.5
Income (loss) from operations 247 6.8 (149) 4.2
Interest expense, net 39 1.1 37 1.0
Provision for income taxes 4 .1 1 --
Income (loss) from continuing operations 204 5.6 (187) 5.2
Loss from discontinued operations -- -- (138) 3.9
Net income (loss) 204 5.6 (325) 9.1
</TABLE>
Net sales. Net sales of $3,642,000 for the three months ended March 31,
1999 were slightly higher than the $3,588,000 for the same period in 1998 as
shipments were relatively consistent for both periods.
Gross profit. Gross profit, as a percentage of sales, improved to 43.3% on
sales of $3,642,000 for the first quarter of 1999 as compared to 40.7% on sales
of $3,588,000 for the first quarter of 1998. Included in gross profit for the
three month period ended March 31, 1999 was the recovery of a $94,000 receivable
which had been previously written-off. Without giving effect to this recovery,
gross profit, as a percentage of sales, was 40.7% for the three month period
ended March 31, 1999 which was comparable to the three month period ended March
31, 1998.
-6-
<PAGE>
Operating expenses:
Selling expenses. Selling expenses decreased to $572,000 for the first
quarter of 1999 from $668,000 for the comparable 1998 period due principally to
the effects of the Company's cost reduction program implemented in the latter
part of 1998.
General and administrative expenses. General and administrative expenses
decreased to $407,000 for the first quarter of 1999 from $460,000 for the first
quarter of 1998 due principally to the effects of the Company's cost reduction
program implemented in the latter part of 1998.
Research and development expenses. Research and development expenses
decreased to $312,000 for the first quarter of 1999 from $391,000 for the first
quarter of 1998 due principally to the effects of the Company's cost reduction
program implemented in the latter part of 1998.
Amortization expense. Amortization expense decreased to $40,000 for the
first quarter of 1999 from $90,000 for the first quarter of 1998. The decrease
was due principally to the write-down of $1,723,000 in intangible assets in
September 1998.
Total operating expenses. Total operating expenses decreased by $278,000
to $1,331,000 for the first quarter of 1999 from $1,609,000 for the first
quarter of 1998.
Interest expense, net. Interest expense increased to $39,000 for the first
quarter of 1999 from $37,000 for the comparable 1998 quarter. The increase was
primarily due to higher interest rates on outstanding borrowings under the
Company's Credit Facility as a result of the waiver and amendment agreement
entered into with the lender in March 1998. See "-Liquidity and Capital
Resources."
Provision for income taxes. Provision for income taxes represents state
franchise taxes. There is no federal income tax provision since the Company has
available net operating loss carryforwards.
Income (loss) from continuing operations. Income (loss) from continuing
operations for the first quarter of 1999 was $204,000 as compared to a net loss
of $(187,000) for the first quarter of 1998.
Loss from discontinued operations. Loss from discontinued operations for
the first quarter of 1998 was $(138,000). There was no loss from discontinued
operations in 1999.
Net income (loss). Net income for the first quarter of 1999 was $204,000
as compared to a net loss of $(325,000) for the first quarter of 1998.
Liquidity and Capital Resources
During the three month period ended March 31, 1999, cash used in operating
activities amounted to $544,000 as compared to $348,000 for the three months
ended March 31, 1998. Working capital at March 31, 1999 was $2,016,000 as
compared to $1,799,000 at December 31, 1998. The outstanding balances of the
Company's Credit Facility of $1,988,000 at March 31, 1999 and $1,613,000 at
December 31, 1998 are being classified as a current liability until such time
the Company consummates the proposed refinancing of its existing Credit
Facility.
-7-
<PAGE>
Historically, the Company's financing needs have been met through
issuances of equity and debt securities. On October 16, 1997, the Company
entered into its existing Credit Facility with a bank which provided for a
$6,000,000 revolving credit facility and a $750,000 term loan facility. The
Credit Facility, which expires on June 30, 1999, replaced the Company's then
existing $5,500,000 credit line and allowed the Company to repay $750,000 of
outstanding indebtedness relating to one-half the principal amount of the
Company's then outstanding 9% Convertible Subordinated Notes due October 17,
1998. Outstanding borrowings under the Credit Facility initially bore interest
at the Company's option at the London Interbank Offered Rate ("LIBOR") plus 2.5%
or one-half of 1% above the bank's prime rate. Outstanding borrowings are
collateralized by substantially all of the assets of the Company and are subject
to eligibility requirements relating to the Company's receivables and
inventories. Under the Credit Facility, the Company is prohibited from incurring
any indebtedness other than, among other things, existing indebtedness,
subordinated debt (with the consent of the bank), and unsecured trade
indebtedness in the ordinary course of business, and is restricted in its
ability to incur liens, make investments, sell assets, make acquisitions and pay
dividends. In March 1998, the Company and the lender under the Credit Facility
entered into a waiver and amendment agreement (the "1998 Amendment") which
waived compliance by the Company with certain financial covenants violated by
the Company in December 1997 and amended certain financial covenants for 1998
and beyond. In connection with the 1998 Amendment, the Company paid the bank
$75,000 on July 1, 1998. In August 1998, the lender waived compliance by the
Company with respect to certain financial covenants violated by the Company in
June 1998.
On August 25, 1998, the Company sold substantially all of the assets and
certain liabilities relating to its Seasoning Division (the "Division"). The net
cash proceeds from the sale of the Division of approximately $4,000,000, after
deducting closing costs, was used to pay down the Company's remaining
outstanding term loan balance under the Credit Facility of $637,500 and a
portion of the outstanding revolving loans of such Credit Facility. In
connection with the Company's sale of the Division, the lender: (a) reduced the
maximum borrowings available to the Company under the Credit Facility from
$6,750,000 to $2,750,000, (b) eliminated two financial covenants and modified
two other financial covenants, and (c) increased the lending rate on outstanding
borrowings to LIBOR plus 375 basis points, or 1% above the bank's prime rate, at
the Company's option. On March 1, 1999, the Company and the lender under the
Credit Facility entered into an amendment (the "1999 Amendment") which extended
the maturity date of the Credit Facility from March 31, 1999 to June 30, 1999.
Pursuant to the 1999 Amendment, the lending rate was increased to 2.5% above the
bank's prime rate and the Company was required to pay $15,000 to the bank. At
March 31, 1999, approximately $1,988,000 remained outstanding under the Credit
Facility, approximately $999,000 was available for borrowings and the
outstanding borrowings under the Credit Facility bore interest at the rate of
approximately 10.25%.
On April 30, 1999, the Company obtained a commitment letter with another
lender regarding a three year $3.0 million credit facility (the "1999 Credit
Facility") to refinance the existing Credit Facility. The closing of 1999 Credit
Facility is subject to numerous closing conditions, including entering into a
definitive credit agreement. The Company believes it has adequate capital to
fund current operations until June 30, 1999, by which time the Company expects
the 1999 Credit Facility will be in place. Should the 1999 Credit Facility not
close as anticipated, the Company will be required to seek further extensions of
its existing Credit Facility or obtain additional financing from other sources
in order to continue its operations and repay the outstanding indebtedness under
the Credit Facility. There can be no assurance that the 1999 Credit Facility
will be consummated, or that additional funds will be available when needed, or
if available, will be on favorable terms or in the
-8-
<PAGE>
amounts required by the Company. If adequate funds are not available to the
Company when needed, it may be required to delay, scale back or eliminate some
or all of its operations, which would have a material adverse effect on the
Company's business, results of operations, financial condition and prospects. In
addition, in the event the Company does not refinance the indebtedness
outstanding under the Credit Facility by June 30, 1999, the loan may be
accelerated and the lender may foreclose on the collateral, which would cause
the Company to be materially and adversely affected.
Year 2000 Compliance
The Year 2000 presents potential concerns for business and consumer
computing. The consequences of this issue may include systems failures and
business process interruption. It may also include additional business and
competitive differentiation. In addition to the well-known calculation problems
with the use of 2-digit date formats as the year changes from 1999 to 2000, the
Year 2000 is a special case leap year which may cause similar problems in many
systems unless remediated.
In 1997, the Company developed a plan with respect to evaluating and
upgrading its information and non-information technology systems (collectively,
"Information Systems") so that its systems would be Year 2000 compliant. During
the latter part of 1997, the Company's management information systems personnel
performed a comprehensive review and assessment of the Information Systems to
verify that they were Year 2000 compliant. In connection with such review, the
Company found certain minor software applications to be non-Year 2000 compliant.
In response to such findings, the Company upgraded its software and conducted
several tests, the results of which indicate that the Company's Information
Systems are now Year 2000 compliant. The historical and currently projected
costs relating to these upgrades and the testing for Year 2000 compliance are
not material, and were and will be expensed as incurred.
The Company is currently making inquiries of its suppliers and customers
to receive assurances that they are Year 2000 compliant. The Company believes
that it will complete this review by the end of the second quarter of 1999.
There can be no assurance that the Company will not be adversely affected by
unanticipated Year 2000 issues, including the failure of a material supplier or
customer to become Year 2000 compliant.
The Company has not developed a "worst case" scenario with respect to Year
2000 issues, and has no Year 2000 contingency plan other than to conduct
business with alternative suppliers identified by the Company as Year 2000
compliant, with whom the Company already conducts business.
If the Company or third parties with whom it has relationships were to
cease or not successfully complete Year 2000 remediation efforts, the Company
could encounter disruptions in its business. The Company believes that such
disruptions would not have a material adverse effect on its business, financial
condition and results of operations. However, the Company could be materially
and adversely impacted by widespread economic or financial market disruption, or
by the Year 2000 computer system failures of third parties that may generally
occur as a result of the Year 2000 issues.
-9-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
On January 19, 1999, the Company granted to certain of its employees
incentive stock options under its 1996 Stock Option Plan for the purchase
of an aggregate of 21,500 shares of Common Stock at $.66 per share, the
market price of the Common Stock on the date of the grant. Such options
vest in equal annual installments over a 5-year period. The option grants
described were made in reliance upon an exemption from the registration
provisions of the Securities Act of 1933, as amended, set forth in Section
4(2) thereof as transactions by an issuer not involving any public
offering.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
Exhibit 27.1 Financial Data Schedule
b) Reports on Form 8-K
None
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<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Dated: May 5, 1999
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
By /s/ Joseph A. Gemmo
-------------------------------------------------
Joseph A. Gemmo
Vice President and Chief Financial Officer
(Principal Financial Officer and Officer Duly
Authorized to Sign on Behalf of Registrant)
-11-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 116,839
<SECURITIES> 0
<RECEIVABLES> 3,522,508
<ALLOWANCES> 235,000
<INVENTORY> 2,692,231
<CURRENT-ASSETS> 6,132,874
<PP&E> 2,239,826
<DEPRECIATION> 1,654,367
<TOTAL-ASSETS> 8,466,304
<CURRENT-LIABILITIES> 4,116,445
<BONDS> 31,183
0
0
<COMMON> 124,496
<OTHER-SE> 3,869,363
<TOTAL-LIABILITY-AND-EQUITY> 8,466,304
<SALES> 3,642,388
<TOTAL-REVENUES> 3,642,388
<CGS> 2,064,308
<TOTAL-COSTS> 1,331,166
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39,304
<INCOME-PRETAX> 207,610
<INCOME-TAX> 3,936
<INCOME-CONTINUING> 203,674
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 203,674
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
